Wednesday, December 31, 2014

In our Monday post one bullet point noted the favorable equity market returns achieved in a pre-election year. Today, Chart of the Day sent out a chart which graphically shows favorable returns that historically have been generated during the first seven months of pre-election years.

"Since 1900, the stock market has tended to outperform during the first seven months of the average pre-election year. For the remainder of the year, pre-election performance has tended to be choppy and slightly subpar. In the end, however, the stock market has tended to outperform during the entirety of the pre-election year. One theory to support this behavior is that the party in power will make difficult economic decisions in the early years of a presidential cycle and then do everything within its power to stimulate the economy during the latter years in order to increase the odds of re-election."

As the the calendar begins a new trading year on Friday, commentary will likely shift to other seasonal market indicators. One such indicator notes that so goes the first five trading days in January so goes the rest of the year. Unless the market experiences a major catastrophe today, this indicator gave investors a false signal in 2014. According to the Stock Trader's Almanac, the first five trading days of 2014 had the S&P 500 Index down .6% while the S&P is up mid teens percent as I write. In spite of this fact, the Almanac notes, "the last 41 up Five Days were followed by full-year gains 35 times for an 85% accuracy ratio and a 14.0% average gain in all 41 years."

The past two years have been rewarding ones for investors. Seasonality alone will not trump fundamentals and the turmoil in the energy market may be signaling broader issues with the underlying economy. We plan on touching on this issue in our upcoming quarterly Investor Letter and additional posts in January.

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